Pros Are Being Picky as Bourses
Reach Dangerously High Levels

This week's participants in The Asian Wall Street Journal Asset Allocation Panel are urging an even more selective approach than usual to stockpicking.

Panelist Giampaolo Guarnieri, a director at Salomon Brothers Asset Management Asia Pacific Ltd., foresees better performances from bond markets this year than from equity markets. While bond markets are likely to benefit from healthy economies globally and improving credit quality, equity markets -- particularly the U.S. -- continue to tread water at dangerous highs, he says. As a result, he is cautious on equities.

Panelist Gregory Neumann, managing director at Scudder, Stevens & Clark Asia Ltd., says his company is also "cautious about the valuation levels" of many equity markets. "The markets are ahead of themselves," he declares. "We're taking a defensive positioning."

Several investment themes are deciding the types of stocks that Scudder is purchasing, says Mr. Neumann. Scudder is particularly searching for companies that have pricing power or for firms that are cutting costs. Since many companies in Europe are streamlining, Scudder has allocated the largest chunk of its assets there.

Elsewhere, Scudder is cautious on the U.S. market and holds just the blue-chip multinational companies in Japan. Scudder's approach to Asian markets is also company-specific, since some of the emerging markets of Latin America, Africa and Eastern Europe appear to offer more attractive opportunities.

Gregory Neumann, Scudder, Stevens & Clark Asia

Europe continues to be Scudder's largest holding, making up 48% of its global equity portfolio. North America, including Canada, forms an underweight position in the pie at 30%. Scudder is also underweight in Japan at 7%. The rest of the portfolio is spread through Asian-Pacific and emerging markets, says Mr. Neumann.

Asia-Pacific (excluding Japan): While many Asian markets are more expensive than their emerging-market counterparts in Eastern Europe and Latin America, the region is still offering some opportunities.

"The stage is set for a market upturn" in the region this year, says Mr. Neumann. He notes that inflation is under control and that trade figures for many countries are improving. Corporate earnings growth for Asia this year is predicted to reach an average 18% to 20%, compared with 15% in 1996, he says.

Driving Scudder's stockpicking strategy in Asia is the hunt for companies that are cushioned against the increasing competition among businesses in the region. That means looking at firms that are regional players or that are well-positioned local companies with globally dominant partners, says Mr. Neumann.

Elsewhere in the region, Scudder owns finance companies in Malaysia. In Taiwan, financial and construction stocks that will benefit from domestic growth are favored. Property developers in the Philippines are also preferred, Mr. Neumann adds.

As for 1996's dud markets of Thailand and South Korea, Scudder remains wary on both. While a second-half turnaround is anticipated in the South Korean economy, Mr. Neumann says the country's "overindebted companies and narrow base" of stocks continue to be a concern.

Scudder's exposure to Thailand is limited to companies that have operations outside of the country, he says. These include petroleum explorer and producer PTT Exploration & Production.

Japan: Scudder has cut its Japan exposure over the past few months on fears that no progress is being made on reforming the country's economy, says Mr. Neumann. However, he notes that the company still holds Japan's big blue-chip exporters as these firms are benefiting from a weak yen.

U.S.: "We're very cautious on the U.S.," says Mr. Neumann. "Expectations now exceed available opportunities." He argues that it is difficult to see what will fuel more stock market growth there.

Europe: Europe holds many companies that are globally dominant in their fields, says Mr. Neumann. He cites Munich Re, Swiss Re and General Re as examples -- these three firms command over 60% of the world's reinsurance markets.

"Even though markets in Europe are hitting all-time highs, earnings growth as a result of restructuring is significant at north of 20% this year," he says.

Emerging markets: Emerging markets in Latin America, Africa and Eastern Europe are highly alluring, says Mr. Neumann. The markets are trading in a cheap range of between five to 14 times earnings, he notes.

Giampaolo Guarnieri, Salomon Brothers

Salomon's Mr. Guarnieri forecasts that U.S. long-bond yields will head lower by the end of the year to reach 6%. "There aren't any strong inflationary pressures" generally, he says.

Asia-Pacific (excluding Japan): There are several key external factors to keep a close eye on when dealing with Asian markets now, says Mr. Guarnieri. He recommends watching the relationship between the yen and the U.S. dollar. A much weaker yen will thrust many Asian countries head-on into competition with Japanese exports.

At the moment, Mr. Guarnieri is still overweight in the Greater China markets. China's cyclical economic recovery continues to be positive for Hong Kong, the mainland markets and Taiwan, he says.

Within the Hong Kong market, Mr. Guarnieri is more interested in stocks outside of the Hang Seng Index since many constituent stocks are expensive. He prefers retailers such as Dickson Concepts (International) and Giordano International, as well as stocks such as food distributor Guangnan (Holdings) that are a proxy to China's growth.

Mr. Guarnieri is also a long-term bull on India "on the back of an improvement on liquidity there," he says. Pakistan, after its recent elections, also appears more attractive, he adds.

Mr. Guarnieri is also nibbling at stocks in Singapore and Thailand. In Singapore, he favors companies that are engaged in intraregional trade, such as Noble Group, a trading house for physical commodities.

Thailand, which has plunged over the past year, is now selectively offering up some bargain stocks, he adds. But Mr. Guarnieri is still avoiding Thailand's troubled financial sector.

South Korea still looks problematic, he says. Salomon's Korean exposure is confined to companies that are domestically oriented, such as machinery maker Daesung Industry.

Japan: Salomon is now neutral to slightly underweight in Japan and is looking to accumulate on market dips. While the country's banking problems remain an obstacle, Mr. Guarnieri says that "on a corporate level, some companies are benefiting from the weaker yen, particularly good news for exports companies and tech-driven companies."

U.S.: Salomon is now taking a more defensive approach to the U.S. equity market, given the market's long bull run. Mr. Guarnieri says Salomon is focusing on the U.S. bond market instead.

Europe: Salomon continues to be very positive on Europe. "There is still money to be made there because of European monetary union convergence," says Mr. Guarnieri. A low interest-rate environment is also boosting markets there, he adds.

Mr. Guarnieri favors France, Italy and Spain, especially since more interest-rate cuts are probable in Italy and Spain. He is warier of the U.K., which began its economic recovery earlier than continental countries and which could be subject to interest-rate increases this year.